Last updated 9 February 2016
Annuities can provide a secure retirement income. Make sure you shop around for the best deal, especially if your lifestyle or health mean you might qualify for extra income.
If you have the type of pension scheme where you build up your own pot of savings, from age 55 you can draw out some or all of your pension pot at any time as cash lump sums, income or a combination of both. For an overview of all your options, see our guide on ways to use your pension pot.
If you need a secure income to pay your bills, you may want to consider buying a lifetime annuity.
What is an annuity?
A lifetime annuity is a type of insurance that can guarantee you a stable income for the rest of your life.
Most people underestimate how long they might live. For example, looking at 65-year-old men today, there's a 50% chance of living to age 87, a 25% chance of living to age 94 and a 9% chance of living to age 100. So it can be useful to have at least some income that you know will carry on being paid however long you live.
Once you have used some or all of your pension pot to buy an annuity, you cannot change your mind and cancel the annuity. However, new rules have been proposed that will enable you to sell an existing annuity to a willing buyer. You would get cash from the sale and the buyer would get an income until your death.The earliest these rules would be implemented is 2017.
Options if your health is poor
If you were to die soon after buying a lifetime annuity, you would not have received much income and the annuity would seem a poor deal.
However, if your life is likely to be shorter than average, perhaps because you smoke or have a severe health condition, you may qualify for an 'enhanced annuity' or an 'impaired life annuity'. These pay a bigger income than a non-smoker or person in good health would get.
If your health is poor, you might want to look instead at alternatives to an annuity that leave your pension pot invested and let you draw out cash flexibly as and when you need it.
How much income might you get?
The most basic type of lifetime annuity is a level annuity. It pays out the same amount of income for as long as you live.
How much income you get depends, in part, on the average length of time the provider expects to pay it out. The older you are when the annuity starts, the shorter that period is likely to be and so the bigger the income you can get.
Some providers look at your postcode. This is because life expectancy is shorter than average for people in some parts of the country and higher in others.
The amount of income you get also depends on investment conditions at the time you buy the annuity. When interest rates are low, annuity rates tend also to be low.
Choices at retirement
The basic principles explained above apply to all annuities. But there are many different types. For example, some pay an income that increases each year which can help to protect the buying power of your income.
Some annuities aim to protect you from losing out if you die soon after buying the annuity by paying a lump sum or ongoing income to your heirs.
You can choose an annuity that pays out just for your own lifetime or a joint annuity that will carry on paying to your partner if you die first.
New annuities are expected to become available that let you vary your income, for example, starting with a high income when you are in early retirement and still active, falling later on and perhaps rising again if you need to pay for care.
So choosing an annuity means matching the type of annuity to your own particular needs and circumstances.
Choosing the right annuity also means shopping around for the best deal because how much income you are offered varies from one provider to another. It is especially important to shop around if you might qualify for an enhanced annuity or impaired life annuity - you will lose out if you accept the income offered to an average person.
Contact a financial adviser if you need help shopping around.